You can’t write off the loan, but you may be able to deduct interest paid.
What are itemized deductions?
The Internal Revenue Service (IRS) allows taxpayers to deduct certain expenses in order to legitimately reduce their taxable income. There are two options: the standard deduction or itemized deductions. The standard deduction is a single, fixed deduction, whereas itemized deductions comprise a variety of expenses that may add up to a greater amount that the standard deduction.
Both the standard deduction and itemized deductions will lower adjusted gross income (AGI) and reduce taxes owed, but choosing which one to use depends on a taxpayer’s specific circumstances.
For single people and married people filing separately, the standard deduction is $6,350 for the 2017 tax year. For married people filing jointly, the standard deduction is $12,700. Your standard deduction increases if you are 65 or older or blind.
State and local taxes (SALT) — including income, property, and sales taxes — can be itemized for deduction. About one-third of taxpayers itemize deductions on their federal tax returns, and nearly all itemizers claim a deduction for local and state taxes paid.
Itemizing deductions is a good option if a taxpayer faces large uninsured or unreimbursed medical or dental expenses. For tax year 2017, medical expenses must exceed 10 percent of AGI before they may be itemized for deduction, and even then only the amount exceeding the 10 percent threshold may be deducted from income.
Other major itemized deductions include unreimbursed business expenses; significant charitable donations; large property or sales taxes; and uninsured casualty or theft losses. Like medical costs, unreimbursed losses must exceed 10 percent of your AGI in order to qualify for the deduction. A host of other expenses and miscellaneous deductions are available to be itemized, subject to eligibility.
Above-the-line deductions, also referred to as adjustments to income, can be used to lower your AGI whether you itemize or take the standard deduction. These include contributions to health savings accounts; contributions to individual retirement accounts (IRAs) and other pension savings plans; student loan interest, student tuition payments, and certain student fees; alimony payments; and a long list of other expenses.
Do you know which deductions you can claim? Use Bankrate’s tax calculators to see if it makes sense to itemize deductions.
Itemized deductions example
Gordon makes quite a bit of money as a criminal-defense attorney, so the standard deduction is too small compared to a long list of potential itemized deductions available to him. Since he owns his own small law firm, he has a long list of unreimbursed business expenses. In addition, a hurricane ripped the roof off his Florida vacation home, and insurance will only compensate some of the replacement costs. Furthermore, he pays an ocean of alimony to three ex-wives, much of which can be deducted.